Draft Finance Bill 2016: first reaction

HM Revenue and Customs
Donald-Drysdale By Donald Drysdale for ICAS

10 December 2015

Donald Drysdale takes a preliminary look at some of the draft clauses in the UK Government’s Finance Bill 2016.

It’s encouraging to hear the current UK Government declare that it wants to make the British tax system simpler and more effective for taxpayers. But those studying the latest legislative proposals might consider this claim disingenuous.

This week, draft clauses for the Finance Bill 2016 have been published with explanatory notes in a 647-page document and 200-page overview.

Such outpourings are incomprehensible to most businesses and individuals. They’re obscure to many parliamentarians, so the intention of parliament is often unclear. They’re also scarcely manageable for the accountants and tax agents without whose help the entire tax regime would collapse.

Personal taxes

Possibly the biggest change to personal tax is the new regime for UK and foreign dividend income from April 2016.  The dividend tax credit will go and a new 0% rate will apply to the first £5,000 of an individual’s dividend income annually. Above that amount, dividend income will be taxed at 7.5%, 32.5% and 38.1% within the basic, higher and additional rate bands respectively. Dividend income will be treated as the highest part of an individual’s income.

Owner-managed companies that have saved income tax and national insurance by paying dividends instead of remuneration will be hard hit – and some might also be affected by a new anti-avoidance rule targeted at conversion of income into capital. Others worse off under the new dividend regime may include pensioners relying on dividends from portfolio investments.

The pensions lifetime allowance will drop to £1m from 2016/17, with increases in line with the consumer prices index from 2018/19.

From April 2016 a tax-free personal savings allowance will apply to savings income (such as interest) of individuals. Basic or higher rate taxpayers will be able to receive up to £1,000 or £500 respectively of savings income free of tax – but none for additional rate taxpayers.  Banks, building societies and National Savings will no longer deduct tax from account interest they pay to their customers – this will be a fundamental change in tax collection for those who remain liable to tax on their interest income.

On the plus side, if and when Scottish income tax rates differ from those south of the border, the new 0% dividend rate and the personal savings allowance should ease tax compliance for those higher rate Scottish taxpayers who receive a limited amount of dividend or savings income and would otherwise have had to account for further UK income tax through self-assessment.

The pensions lifetime allowance will drop to £1m from 2016/17, with increases in line with the consumer prices index from 2018/19. Transitional protection will be available to give qualifying individuals up to £1.25m protection.  The government is still considering options for wider pensions tax reform.

Employees

Tax relief for travel and subsistence expenses will be restricted for certain workers engaged through employment intermediaries such as umbrella companies or personal service companies.

There is to be a statutory exemption on certain individual qualifying benefits up to £50, subject to an annual cap of £300 for directors or other office holders of close companies.

Changes are to be made to the rules for employment-related shares and options, for example, clarifying the position of internationally mobile employees, disallowing preferential share incentive plan awards to particular employees after a corporate restructuring, and permitting late registration of share schemes in cases of reasonable excuse.

Landlords

From April 2016 landlords will be able to claim a deduction (instead of wear and tear allowance) for expenditure on replacing furniture, furnishings, appliances (including white goods) and kitchenware provided for use in let residential properties. The cost of like-for-like replacement or the nearest modern equivalent will qualify. This won’t apply for furnished holiday lettings, where capital allowances will continue to be available.

Company tax

Changes are to be made as part of the modernisation of the tax regimes for loan relationships and derivative contracts, addressing situations where the interactions with accounting rules or other elements of tax law might otherwise have resulted in unintended and unfair outcomes.

New conditions are to be introduced to the Patent Box regime to comply with international requirements arising from the OECD’s BEPS project. The changes will generally apply from July 2016, although some intellectual property acquired from January 2016 will also be affected.

Also from the BEPS project, new measures will aim to neutralise the effect of hybrid mismatch arrangements from January 2017. These typically involve multinational groups, where either one party gets a tax deduction for a payment while the other party doesn’t pay tax on the corresponding receipt, or there is more than one deduction for the same expense.

Modelled on existing corporation tax reliefs for the creative sector, a new relief will be given for qualifying expenditure incurred on orchestral concerts from April 2016.

Tax avoidance and evasion

Many of the new Finance Bill 2016 provisions are aimed at rooting out tax evasion.  Other measures seek to counter aggressive tax avoidance, some of which arguably still falls within a grey area between acceptable tax planning and illegal evasion.

The general anti-abuse rule (‘the GAAR’) exists to combat abusive schemes, but a new penalty of 60% of tax due is to be charged in all cases successfully counteracted by the GAAR. There will also be changes to the GAAR procedures to help HMRC use it more effectively against marketed avoidance schemes.

New rules will increase the minimum penalties for deliberate offshore tax evasion, require greater levels of disclosure from tax evaders, and increase naming of offshore tax evaders.

New measures from April 2017 will tackle serial tax avoiders. Where a taxpayer has used a tax avoidance scheme defeated by HMRC, a special reporting requirement will be imposed.  After at least four such defeats, the name of the avoider may be published and they may be restricted from accessing certain tax reliefs for a period.

Offshore evasion has come in for particular attention. New rules will increase the minimum penalties for deliberate offshore tax evasion, require greater levels of disclosure from tax evaders, and increase naming of offshore tax evaders. In serious cases of deliberate offshore tax evasion, a new penalty may arise based on the value of the asset which led to the evasion.

New civil penalties will apply to individuals and businesses deliberately enabling offshore evasion, and they may be named in the most serious cases. There will also be new offshore tax evasion criminal offences which don’t rely on the intent of the evader.

Consultation on the draft clauses

The government’s consultation on the legislative proposals will run until 3 February. ICAS will be responding on matters of concern, and would welcome input from ICAS members, ICAS Tax Professionals (ITPs) or students at tax@icas.com.

Article supplied by Taxing Words Ltd

Topics

  • Tax
  • Business
  • Accountancy

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